Washington State Tackling Infrastructure, Education

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PHOENIX –Infrastructure funding and municipal revenue could be on the chopping block when Washington state lawmakers convene.

Legislators return to the state capital of Olympia on January 11 with considerable mandates to meet in a national election year.

In the Far West, Washington generates the second-most municipal bond issuance after California, with $8 billion from all state and local issuers in the first half of 2015 alone.

But the state, like many others, has infrastructure funding challenges while also facing a significant state Supreme Court order on education funding that appears to require lawmakers to either raise new revenue or divert money from elsewhere to fund K-12 schools.

Hugh Spitzer, a bond lawyer in the Seattle office of law firm Foster Pepper and a visiting professor at the University of Washington School of Law, said that an important thing to watch is what if anything the legislature does with Washington's Public Works Trust Fund.

The PWTF is a state-capitalized infrastructure bank in existence since the mid-1980s. Washington issuer groups have complained that the state has been pilfering money from the program, and Spitzer said the program, once effective, is now being "gradually destroyed" by state lawmakers.

"It has been very successful in loans to local governments across the state," Spitzer said. "The repayment history has been excellent. There have been hardly any defaults."

Spitzer said the program has given many small and medium-sized issuers access to capital at much lower rates, often under 3% interest, than those issuers could have hoped to achieve in the bond market.

The legislature has been diverting money away from the program in recent years. The previous legislative session ended in a 2015-2017 budget that cut $73 million in each of the next two biennia, and did not fund any new loans.

"They utilized our money out of our public works assistance account to balance their budget," said Victoria Lincoln, a government relations advocate at the Association of Washington Cities.

Spitzer said that the funding rollbacks have drastically reduced the size of the loan program.

"Basically, this program is not lending much of anything now," Spitzer said.

Spitzer said he expects the result to be a gradual increase in the number of bank loans to small and medium-sized issuers, and also more bond deals at market rates.

"I would characterize this as an important trend," Spitzer said.

The Washington Supreme Court's decision in the 2012 McCleary v. State of Washington case is driving budget and public finance policy decisions in Olympia.

The court found that the state was not meeting a constitutional obligation to fully fund basic education and mandated $4.6 billion of new K-12 funding by 2018. The most recently enacted budget provided $2.7 billion of that.

"The legislature still has a big obligation to fund K-12," Lincoln said.

The court put in place a fine of $100,000 per day starting Aug. 13 as a penalty for the state's failure to fund schools at the levels the court had mandated, a fine Moody's Investors Service said was insignificant to Washington and a positive for school credits in the state by creating public and legal pressure to ramp up spending.

Spitzer said that Washington, like other states, is struggling to deal with inadequate transportation infrastructure.

"Transportation is the highest priority, from the public perspective," he said. "In urban areas, that's the big thing."

Spitzer said he thinks one major event that could happen soon is a new state bond pledge for transportation.

The bonds would have to be authorized by the legislature, Spitzer said, and would likely be backed by gas taxes and vehicle license fees that are not subject to the state's debt limit. Spitzer said that nothing has happened along those lines formally as of yet, but that he was aware of "detailed discussions" taking place on that subject.

Lincoln said that while the upcoming session will probably feature some financial action, the fact that the budget to be decided upon is a "supplemental" budget to the biennial means that it is unlikely any major policy changes could come out of it. Things will really come together at the next biennial budget, she said, especially since lobbyists expect this supplemental session to be quick.

"It's an election year, so we expect them to probably want to get out of town as quickly as possible," she said.

The next biennium starts July 1, 2017. The state's Office of Financial Management's State Economic and Revenue Forecast Council recently increased its forecast for the 2017–19 biennium making total Near General Fund collections projected at $41.3 billion.

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